I have been bullish on Starbucks Corporation (NASDAQ:SBUX) for years, but I just recently recommended a call option trade to play Starbucks’ upcoming earnings announcement. SBUX will report its numbers after the close tomorrow, Jan. 22. So, there is added risk to this trade. I took the trade on a technical basis, but I also love the fundamentals of Starbucks.
Looking at the chart below, support at $79 – $78.50 has held since mid-November despite the recent dips below the 50-day moving average. SBUX shares reclaimed this level to start the week, and additional hurdles are at $83 – $84. The 52-week high is at $84.20.
Wall Street is looking for Starbucks to post a profit of 80 cents per share on revenue of $4.8 billion. The suit-and-ties that follow SBUX stock have a high estimate of Starbucks earning 81 cents per share, while the low estimate is at 78 cents per share. This would mean a beat of 1 cent per share or a miss of 2 cents per share. Starbucks has matched or beat estimates in each of the past four quarters.
SBUX shares fell nearly $2 in late October of 2014 after Starbucks matched expectations but missed on revenue numbers. In late July, SBUX shares fell from $80.45 to an intraday low of $77.90 before closing at $78.74. Last April, Starbucks stock gained 36 cents per share after matching estimates but falling shy of revenue numbers. And, finally, around this time last year, shares added $1.49 and settled just below $75.
Needless to say, Starbucks is going to have to hit it out of the park to impress Wall Street.
At current levels, Starbucks stock is only up 10% from a year ago, but it deserves a higher multiple. Although revenue has slacked in recent quarters, I believe SBUX will announce a blowout quarter when it steps up to the podium after Thursday’s close.
A beat of 2 to 3 cents per share would be nice, but revenue numbers will need to hit closer to $5 billion. More importantly, the conference call and Starbucks’ outlook for 2015 need to impress. This type of bullish news should get SBUX shares pushing blue-sky territory.
An earnings miss or lowered guidance could cause SBUX shares to slip to $78 – $76, depending on the severity of the news. This would get the 100-day and 200-day moving averages in play and might represent a buying opportunity for the longer term.
I chose the call options as a “cheaper” way to play a possible breakout rather than buying the stock. While there are January and weekly options available to trade on Starbucks, I chose the regular February options to give the trade more time to play out.
These options will do well if Starbucks stock makes a run at $84 – $85 on an incredible quarter. The “break-even” price is at $85.75, technically, by late February.
A close back below $80 and the 50-day moving average would be a bearish development. In this event, the options could be closed to save some premium.
There are numerous price targets scattered between $90 and $100 from some of the analysts that cover Starbucks. Some brokerage firms also have SBUX stock as their top pick for 2015.
I like the risk/reward this trade offers, as I’m more bullish than bearish on SBUX stock and its upcoming earnings announcement.
Buy to open the SBUX February 85 calls at current levels.
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